Forex trading psychology is capable of playing a significantly bigger role in things than you may initially think. You see, people tend to think that the reason why people lose money is due to them making mistakes thanks to not understanding the technical side of things. Alternatively, they feel that they simply fail to follow the markets in the correct way and that is why they run into a loss.
However, in all honesty there is another area which actually causes most mistakes. That area is the psychology of trading.
You see, so much of successful trading is actually down to your own mind. You need to be in a position to trust your instincts and when you have correctly judged the right time to either buy or sell.
When you are dealing with a market that has such a high volume of trade on a daily basis along with it being so volatile, then trusting your opinion and ideas becomes even more important.
The Common Trait.
Do you know what the most common trait is for anybody trading in this market? The answer is fear. The problem is that fear does strike in a number of different ways, and even realizing that it can pose a significant problem is a major step forward.
With Forex, there is the fear of not making the trade at the correct time. Also, people worry about missing out on wonderful opportunities, and they then focus on what they could have done rather than looking out for new ideas or trades.
Also, fear is likely to make you always go for the safe option. Of course, this isn’t always best and it’s something you need to address.
The good news is that there is a way around all of this, and that is via a planned trading strategy.
Fear Biases of Psychological Trading.
Within Forex, there is the idea of several biases of psychological trading. That is something that you need to identify and to understand.
The first is referred to as overconfidence bias. That means you have absolute faith that the market is going to do something and you cannot see any other option as even being possible. This overconfidence can lead to mistakes as you are potentially blocking out deciding factors that could change the direction that the market is heading in.
The next is called an anchoring bias. That is when you are more uncertain about things and view a possibility as only being a ‘probable’ option rather than having that absolute confidence mentioned above.
The third option is known as a confirmation bias. That is when you see evidence of something in the market that rather neatly ties in with your own individual thoughts. Once again, you have the fear of looking elsewhere for other options and you become more settled on this as being the only way ahead.
Finally, you have loss bias. This is where you have really lost all kinds of hope and faith in the market and you simply view things in a sense of hope rather than expectation. You are too afraid to look elsewhere, so you stick with what you think as being safe which isn’t always the best option to choose.
Even though they all sound different, they are all based in the same trait, fear.
Dealing with the Bias.
So, as these four different options are all involved in Forex trading, we can look at the psychology behind the thoughts and decide how to get around these problems.
With the first one, the main thing to do is to watch out for you basically getting carried away with success or, as others put it, the idea of trading euphoria. This affects your ability to make the right calls as you are focused too much on the entire idea of how well you are doing.
The key here is to look at your trades and to treat each one as if it is your first. Allowing yourself to fall into the trap of believing that you can do no wrong is sure to lead to your absolute failure. Also, you will then be more likely to take bigger risks leading to larger losses.
With the anchoring bias, you are often sitting in your comfort zone and that’s not always the best thing. In fact, it leads to mistakes being made due to missed opportunities.
You have a reluctance to think about new opportunities and you may even focus on information that is outdated due to you being hesitant to move forward with things. The fear of doing something different will cripple you.
For the confirmation bias, you have fallen into the trap of searching for information that fits in with your own individual ideas. You feel that you have the correct solution so have to locate data that helps with that idea. Of course, this leads to mistakes when your initial idea is wrong, but you are then blinded by everything else that you cannot see this.
Finally, for loss aversion it does mean you are likely to cut back on your profits due to the fear of making losses. You don’t believe in taking any kind of risk and this is shown in your actions. Also, you need to remember that if your comfort zone becomes so small that it will mean you are unable to operate.
The only way to deal with Forex trading and the psychology attached to it is to go ahead and take action. However, you must only do this after forming your trading plan, so you are fully aware of the direction you are heading in.
You need to accept that there will be times where you make some kind of a loss and it’s what you then do as a reaction to it that will prove to be the important thing. You want to make sure that you learn from your mistakes and change your approach or you will continue to get the same results over and over again with no idea as to why that is the case.